On July 3, 2023, the SEC staff’s no-action relief expired, which had previously permitted broker-dealers to receive separate payments for research without being subjected to investment adviser registration.  The SEC staff initially took its no-action position in October 2017 to assist U.S. firms wrestling with the European Union’s then-approaching Markets in Financial Instruments Directive (MiFID II).  MiFID II introduced new restrictions designed to cause investment managers to “unbundle” the expense of research from the expense of trade execution.  The SEC’s Division of Investment Management later extended the no-action position until July 3, 2023.   Nearly a year ago, William Birdthistle, Director of the SEC’s Division of Investment Management, announced that the no-action relief would not be renewed, stating it was a temporary position and not a permanent solution.   

Currently, under the safe harbor established by Section 28(e) of the Exchange Act, an investment manager may use its clients’ funds (i.e., “soft dollars”) to pay for brokerage and research services through a “bundled” payment.  MiFID II, among other things, prohibits investment managers from receiving or retaining any inducements for conducting business, including “research,” as defined under the directive, unless the investment manager pays for such research from (1) its own funds (i.e., “hard dollars”), (2) a separate research payment account (RPA), funded with its clients’ money or (3) from a combination of the two.  

MiFID II’s research unbundling rules introduced heightened concerns for U.S. broker-dealers because receiving MiFID II-compliant direct payments for research from EU investment managers would constitute “hard dollar” payments, thereby implicating broker-dealers’ status under the Advisers Act, and potentially subjecting such firms to regulation as investment advisers.  This tension between U.S. and MiFID II regulatory regimes spurred SIFMA and other industry participants to seek relief from the SEC, which the SEC staff addressed in its October 2017 no-action letter and its initial extension. 

While the no-action relief has expired, European regulators announced in June 2023 that reforms to MiFID II would amend the current research payment rules and re-introduce bundling, if proper disclosure is made to clients.

In response to the expiration, SEC Commissioner Mark Uyeda released a statement noting his disappointment, and expressed concern that restrictions to broker-dealer research could result in increased usage of less credible sources of information, which could potentially impact market prices and volatility adversely. Commissioner Uyeda further suggested that the SEC should consider harmonizing rules for investment research to help better facilitate an informed marketplace.  The SEC’s position has also been subject to bipartisan pressure from the U.S. Congress.  On July 11, 2023, the House of Representatives passed H.R. 2622, directing the SEC to extend the no-action relief for six months, conduct a study of the impact of allowing expiration or maintaining the effectiveness of the no-action relief, and report on findings and conclusions to applicable Congressional committees.  On July 12, H.R. 2622 was referred to the Senate, which is separately considering companion bill, S. 2141.  While it is not clear whether and how the actions contemplated by the House and Senate legislation can be enforced if ultimately passed into law, there is some hope that future relief is possible.  In the interim, the industry remains in a state of limbo, without no-action relief and with few commercially effective solutions.

Wayne M. Aaron, a shareholder in our Investment Services group, previously discussed the implications of the no-action relief’s expiration in a summary available here.  Our prior summary of the no-action relief is available here.